Illinois has joined a growing list of states creating workarounds for the $10,000 federal limitation on the deduction for state and local taxes that was enacted as part of the Tax Cuts and Jobs Act of 2017 and is in effect through tax year 2025. On August 27, 2021 Illinois Governor J.B. Pritzker signed S.B. 2531 into law, which allows qualified entities to make an annual irrevocable election to pay the tax on the entity’s net income, with the owners entitled to claim a refundable credit against their Illinois income tax liability. The election will be available for tax years ending on or after December 31, 2021 and before January 1, 2026. However, the Illinois pass-through entity (PTE) tax will no longer be effective if the federal SALT limitation is repealed.
Who is Eligible?
The new law allows partnerships (other than publicly traded partnerships under Section 7704 of the Internal Revenue Code) and Subchapter S corporations to participate.
Entity Election, Calculation and Payment
The election to pay the tax is irrevocable and must be made annually by the qualified PTE in the form and manner prescribed by the Illinois Department of Revenue. The law does not provide an option for a partner/shareholder to individually opt out. For entities electing to participate, the non-resident withholding requirement is suspended, and non-resident members will not be required to file an individual income tax return, if their only sourced income is from an electing entity and the credit equals or exceeds their individual liability.
The rate for the elective tax is 4.95% and is paid on the entity’s entire net income allocable to the state. When calculating the tax, the entire income of the entity will be included for resident members and only the allocable share of Illinois source income for non-residents would be included in the tax base calculation. It should be noted that the PTE tax base includes all income distributable to tax exempt partners, some of which may not be subject to Illinois tax. The elective PTE tax is in addition to the existing Replacement Tax and does not impact the Replacement Tax calculation.
An electing PTE is liable for the payment of tax and must make quarterly estimated payments required under Sections 803 and 804 of Act 100-555. If the entity fails to pay the tax assessed, the partners or shareholders will be held individually liable based on their share of the net income.
Claiming the Credit
Owners are entitled to claim a refundable tax credit on their Illinois individual income tax return equal to the elective tax paid on their behalf. Resident individuals may also claim a credit for taxes paid to other states by a partnership or S corporation if the tax is “substantially similar” to the PTE tax in Illinois.
Illinois is the latest to join other states in approving a workaround for the state and local tax deduction limitation; those states include Alabama, Arkansas, Arizona, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Louisiana, Maryland, Minnesota, New Jersey, New York, Oklahoma, Rhode Island, South Carolina and Wisconsin.
These workarounds are not uniform and have various effective dates. Taxpayers should consider their specific tax structures to determine if they could benefit from participating in the workarounds created by the various states.
Please contact your Mazars professional for additional information.